De-risking large residential developments

Published on May 02, 2019

By Tang Wei Leng

Real estate development is a very dynamic process with relatively long project timelines and typically involves substantial capital injection. Like any investments or business dealings, developing or acquiring real estate comes with its own set of risks, including land value risk, construction risk, policy risk, and revenue risk.

Generally, the larger the project size – both in terms of land size and quantum value- the higher the perceived risks. Coupled with a softer property market, some developers are a lot more cautious and may think twice about investing in a major real estate project, such as the acquisition of mega sites for residential development.

While it is not possible to completely eliminate risks in any sort of investments, there are ways to manage and mitigate them. Colliers is in the midst of marketing a high-profile residential collective sale - Braddell View - in Singapore and we are acutely aware of the risks and concerns that real estate developers face when it comes to big projects.

Apart from conducting thorough due diligence and rigorous research on the site and market conditions, developers can consider adopting other strategies to manage risks and lower the level of uncertainty. Let’s take a look at them in turn.

Unite and conquer

Developers can forge partnerships and potentially find some safety in numbers. Investing via a consortium has obvious merits: pooling of capital and resources, scale aggregation, as well as sharing of risk and know-how. Tying up with the like-minded partner(s) with complementary strengths will also help to drive synergies and could help to manage development costs. Take the public tender in Singapore last year for the attractive commercial and residential site in Holland Road - the 15 bids received came from 10 consortiums, with some submitting multiple bids.

Collaboration, which provides more firepower, is essential particularly for massive deals. It is akin to ‘hunting as a pack’ where different partners with varying skills and/or resources come together to achieve a the most optimal outcome. As they say, the whole is greater than the sum of its parts.

Phased development

Subject to relevant approvals from the authorities, phased development of large sites can also help developers mitigate risks and manage costs. By dividing the project into a series of smaller ones - spaced out over a period of time – developers can better plan, design and execute on each development.

It also allows developers to be more flexible and responsive to market conditions, such as accelerating or delaying certain phases of the development in tandem with shifts in demand and supply dynamics, providing an opportunity to benefit from a rising market in the future.

The construction costs of building the entire mega project can also be spread over a longer period under the phased development model. In addition, some stock exchange listed developers may see a long-term development project as providing employment of resources and balance sheet.

More importantly, the consortium that is undertaking the development of a large land site can essentially be seen as a master developer who takes a big-picture and a more seamless, integrated approach to developing the project.

Stable investment environment

Large real estate developers are often active in more than one country and have a diversified portfolio. In terms of property investment markets, Singapore - an epicentre for financial and business in Asia - stands out as one of the top destinations. Investing in Singapore, in our view, already helps to mitigate a certain level of risks, given its stable political structure, rule of law, transparent and efficient regulatory framework, top-notch infrastructure, low unemployment rate, affluent middle-class, availability of talent, and healthy economy.

Drawn by these factors, developers, sovereign wealth funds and private equity firms have all snapped up prime real estate and trophy assets in Singapore in the last few years. According to Colliers Research, total real estate investment sales came in at SGD38.0 billion for the whole of 2018, following on from the stellar SGD40.1 billion achieved in 2017. We believe Singapore will remain attractive to investors as the yield spread continues to be one of the more attractive across markets.

While it is not without risks, the successful acquisition and development of a trophy site will garner positive exposure and prestige, thereby boosting the developer’s reputation.
Speak to Colliers for more real estate investment insights and opportunities.